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Rating Action:

Moody's affirms the Netherlands' Aaa ratings, maintains stable outlook

11 Jun 2021

Paris, June 11, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of the Netherlands' Aaa long-term issuer and senior unsecured ratings as well as its Prime-1 (P-1) short-term issuer rating. The outlook remains stable.

The key drivers for affirming the Aaa ratings of the Netherlands are:

(1) The Netherlands' economic strength has shown itself to be resilient, even to a very large shock such as the pandemic;

(2) The government's fiscal metrics remain very robust, even though the authorities used the government's balance sheet to blunt the impact of the pandemic on the real economy; and

(3) Institutions and governance are among the strongest in our rated universe. This rating driver is considered to be a governance factor under Moody's ESG framework.

The stable outlook reflects our view that downside risks to the Netherlands' credit profile are mitigated by the high degree of economic resilience, significant fiscal space, the sovereign's institutional capacity to manage shocks and a proven track record of addressing long-term challenges such as demographic change. The Netherlands also shows limited susceptibility to event risks.

The Netherlands' local and foreign currency country ceilings remain unchanged at Aaa and its short-term foreign currency bond ceiling remains at P-1.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Aaa RATINGS

FIRST DRIVER: THE NETHERLANDS' ECONOMIC STRENGTH HAS SHOWN ITSELF TO BE VERY RESILIENT DURING THE PANDEMIC SHOCK

The diversified and competitive Dutch economy was quite resilient during the combined health and economic shocks in 2020. The Netherlands' share of global export markets has held up better than for some of its European peers, reflecting comparatively stronger competitiveness. The Netherlands has managed to be a world leader in adopting flexible work arrangements while retaining a high-quality social safety net. It is also a leader in ensuring that the labour force has a high level of digital skills and it continues to invest in the skills that will be in high demand for future areas of growth in advanced economies.

As was the case for most advanced economies, the economy contracted in 2020 due to the impact of the coronavirus pandemic, but its contraction was milder than what Moody's has observed in most euro area countries. The highly diversified nature of the Dutch economy and the high degree of digitalization in the economy provided more resilience to the economic shock caused by the pandemic. The government's willingness and ability to use its balance sheet to support the economy also helped to soften the economic impact of lockdown measures.

Looking ahead, Moody's expects that the Netherlands will make a quick economic recovery in spite of the economic contraction in Q1 2021. In fact, Moody's now expects that pre-pandemic growth levels will be reached in 2021. The recovery will be supported by the continuation of government financial support packages into Q3 2021, but investment spending will also make a positive contribution to growth this year. Moody's anticipates that the recovery will accelerate in 2022 due to a sharp recovery in private consumption; as is the case in many countries, households have accumulated significant savings during the pandemic and Moody's expects much of that savings to be spent. Increased wages due to collective labour agreements will also support economic growth.

Over the longer term, Moody's thinks that the Netherlands' growth potential is slightly above 1.5% per annum, which is somewhat slower than what Moody's has observed in the past because of the aging population. However, the government is making significant investments in education and R&D to increase growth potential and counteract some of the negative impact of a modest decline in the working-age population (though it is noteworthy that the participation rate of workers over the age of 65 is among the highest in the European Union (EU, Aaa stable) and is rising). The Netherlands is also having some success in encouraging workers to remain in the labour force for longer. In fact, the European Commission's latest Ageing Report shows that Dutch men will have the highest average retirement age in the EU in 2025.

SECOND DRIVER: FISCAL METRICS REMAIN ROBUST DESPITE PANDEMIC-RELATED GOVERNMENT SUPPORT

The Netherlands has a track record of maintaining prudent fiscal policies and relatively low debt levels. The government was running fiscal surpluses going into the crisis, and the increase in general government debt is expected to be small (just under 10 percentage points) relative to peers. While the 2021 deficit will remain high because of higher healthcare costs and the extension of emergency measures that will protect employment and maintain household purchasing power, in 2022 Moody's expects that higher revenues and the end of emergency measures will allow for a rapid decline in the deficit. This, in turn, will support a gradual decrease in the debt burden.

The debt is also becoming even more affordable. Interest costs are falling steadily throughout the forecast period and will total only 0.2% of GDP by 2024 (0.5% of general government revenues). The Dutch State Treasury Agency (DSTA) is targeting a 6-8 year average maturity between 2020-2025, so somewhat longer than what Moody's sees in the Government of Germany (Aaa stable) but a shorter weighted average maturity than what Moody's observes in the Government of the United Kingdom (UK, Aa3 stable) which has a clear preference for issuing longer-dated debt) and in lower-rated countries that are more vulnerable to volatility in funding cost (such as the Government of Spain (Baa1 stable) and the Government of Italy (Baa3 stable)) when risk perceptions change.

THIRD DRIVER: EXCEPTIONALLY STRONG INSTITUTIONS AND GOVERNANCE

Moody's assesses the Netherlands' strength of institutions and governance to be among the highest in the world. The Dutch have a track record, which extends back nearly two centuries, of bringing debt levels down when they have risen as a result of a deterioration in economic conditions. This track record continued in the years following the global financial crisis, where a 25 percentage point increase in the debt burden was largely unwound between 2014 and 2019 through a combination of asset sales, primary budget surpluses, robust economic growth, and declining funding costs. More generally, there is a widespread political consensus in favour of fiscal consolidation and debt reduction, as demonstrated most recently in political parties' manifestos for the 2021 lower-house elections. While the speed of debt reduction is likely to be somewhat slower in the coming years due to decisions to invest in education, R&D, and other policies that are likely to support long-term growth, there appears to be a clear cross-party consensus in favour of keeping the debt burden below 60% of GDP.

Independent institutions such as the CPB, Statistics Netherlands and the Netherlands Court of Audit play a strong role in fiscal governance. Expenditure ceilings are inflation-adjusted and set for an entire legislative term while automatic stabilizers work on the revenue side. Under Dutch fiscal rules, revenue windfalls cannot be used to finance expenditure and, in general, departments need to compensate for any overspending themselves. The Netherlands has codified these fiscal rules in law, and the law covers both the national government and subsectors of the government, such as local authorities. The Dutch authorities are keen on improving on the already robust fiscal framework. For instance, in 2017 the current set of fiscal rules was reviewed to identify ways it could be better aligned with the European framework and address certain features that lead to procyclical fiscal outturns, and the Dutch State Treasury Agency evaluates its debt management policy framework every four years.

Macroeconomic policy formulation and implementation is generally sound and the authorities take a forward-looking and pro-active stance, focusing on maintaining the Netherlands' competitive edge and ensuring long-term fiscal sustainability. However, the Dutch economic structure and high degree of trade openness exposes it to external shocks and the authorities have limited means to proactively counter these.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

The Netherlands' ESG Credit Impact Score is neutral-to-low (CIS-2), reflecting moderate exposure to environmental risks, low exposure to social risks, and a very strong governance profile that supports the rating and in general capacity to respond to shocks.

Its overall E issuer profile score is moderately negative (E-3), driven by elevated exposure to physical climate risks, in particular stemming from rising sea levels. The Netherlands has centuries of experience in managing water risk, and it has invested significant resources in its water defenses. It has institutions such as the regional Water Boards that allow it to engage in longer-term planning to deal with water risk, as well as technical expertise in water management. However, it is an unavoidable fact that the largest concentration of the Netherlands' wealth and population is in the Randstad, the area that includes Amsterdam, Rotterdam, The Hague, and Utrecht that is particularly vulnerable to rising sea levels.

We assess its S issuer profile score as neutral to low (S-2), reflecting low exposure to social risks across most categories. The only category than entails moderately negative risk is demographics: demographic change in the form of relatively rapid population ageing poses a long-term challenge mainly to the Netherlands' potential growth outlook and, to a much lesser extent (because of past pension reforms), to fiscal sustainability.

The Netherlands' very strong institutions and governance profile support its rating and this is captured by a positive G issuer profile score (G-1). The country has a very strong institutional framework, fiscal policy is prudent, forward-looking and long-term oriented and overall policy formulation and implementation is prudent and transparent. Coupled with high wealth levels and strong government financial position, this supports a high degree of resilience, mitigating E and S risks.

RATIONALE FOR STABLE OUTLOOK

The recommendation to affirm the stable outlook reflects our view that downside risks to the Netherlands' credit profile are mitigated by the high degree of economic resilience, significant fiscal space, the sovereign's institutional capacity to manage shocks and a proven track record of addressing long-term challenges such as demographic change. The Netherlands also shows limited susceptibility to event risks.

GDP per capita (PPP basis, US$): 57,534 (2020 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -3.7% (2020 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.9% (2020 Actual)

Gen. Gov. Financial Balance/GDP: -4.3% (2020 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 7.8% (2020 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: aa1

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 08 June 2021, a rating committee was called to discuss the rating of the Netherlands, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. Other views raised included: The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING DOWN

The Netherlands' Aaa government bond rating would come under downward pressure if Moody's were to observe a material and prolonged deterioration in its economic strength. Additionally, the rating could come under pressure in the event of a sharp increase in the government debt burden that Moody's deemed to be unlikely to be reversed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are unsolicited.

a.With Rated Entity or Related Third Party Participation: YES

b.With Access to Internal Documents: YES

c.With Access to Management:YES

For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sarah Carlson, CFA
Senior Vice President
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo Villa
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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